Ind-Ra: Fourth Quarter GDP Surprised on the Upside, but Capex Continues to Disappoint

Gross domestic product (GDP) in 4QFY16 came in higher at 7.9% (based on the provisional estimate of the Central Statistical Office (CSO)) than Ind-Ra's forecast of 7.4%. Real GDP in FY16 grew at 7.6% (similar to CSO's advanced estimate of 7.6%), marginally higher than Ind-Ra's expectation of 7.5%. Although overall GDP in FY16 is in line with Ind-Ra's expectation, sectoral composition of growth on the production/supply side has undergone a change. As against the FY16 advanced estimate, the FY16 provisional estimate of CSO suggests lower services gross value added (GVA) growth and marginally better industrial GVA growth. At a more disaggregated level, the sectors that have grown higher than the advanced estimates are mining and electricity.

The 'mining and quarrying' sector grew at 7.4%, while 'electricity, gas, water supply, and other utilities' grew at 6.6% in FY16 as against the earlier estimates of 6.9% and 5.9%, respectively. Manufacturing growth came in lower at 9.3% as against the advanced estimate of 9.5% in FY16. In 4QFY16, manufacturing grew 9.3% yoy, lower than the previous quarter growth of 11.5% yoy. Industry as a whole grew 7.9% in 4QFY16 and 7.4% in FY16, led by mining and electricity.

Services sector grew 8.9% in FY16 as against 10.3% in FY15. On a quarterly basis, services grew 8.7% in 4QFY16, which is the lowest in the last seven quarters. Services growth slowed due to lower growth in 'financial, real estate and professional services' and 'public administration and defence' in 4QFY16.

On the production side, agriculture has done well mainly because of the base effect. Growth in agriculture in 4QFY15 was affected by unseasonal rains, which resulted in negative growth of 1.7%. Agriculture growth has benefited from this and the sector clocked a growth rate of 2.3% in 4QFY16. For FY16 as a whole, agriculture growth came in marginally better at 1.2% as against the CSO advanced estimate of 1.1%, mainly due to higher production of food grains.

Ind-Ra believes that the overall pattern of growth in FY17 is not going to be very different from what has been witnessed in FY16 except that agricultural GVA growth would be in excess of 2% and overall GDP growth 7.7%.

On the expenditure/demand side, real GDP at constant (2011-12) prices grew 7.9% in 4QFY16, surprising on the upside led by buoyant growth in private final consumption expenditure. Private final consumption expenditure (which had a share of 55.3% in GDP) grew 8.3% in 4QFY16 and 7.4% for the year as a whole as against 6.2% in FY15. Growth in investment or gross fixed capital formation disappointed with a negative growth rate of 1.9%yoy in the fourth quarter, which is the lowest since 4QFY14. This indicates that investment demand is still low despite the stepped-up capital expenditure by the government. Ind-Ra believes corporate sector investment will remain down for the foreseeable future due to excess capacity in several manufacturing sectors coupled with the stretched balance sheet of infrastructure companies.

Government final consumption expenditure growth came in marginally lower at 2.9%yoy. Exports contracted further 1.9% yoy, although the contraction was lower than previous quarters of FY16.

A closer look at the GDP components shows that the item 'discrepancies' gave a fillip to GDP growth in 4QFY16. The line item 'discrepancies' in GDP rose sharply to INR1432.10bn in 4QFY16 from INR299.33bn in 4QFY15, up 378.4%yoy. 'Discrepancies' accounted for 4.8% of GDP in 4QFY16. If one remove 'discrepancies', GDP growth in 4QFY16 would fall to 3.9% and FY16 GDP growth will be 5.2%.

Nominal GDP growth at 10.4% in 4QFY16 was the highest in seven quarters. GDP deflator remained positive at 2.2% in 4QFY16, after clocking 1.3%, negative 1.1% and 1.7% in 1Q, 2Q and 3Q of FY16, respectively. GDP deflator is moving in tandem with Wholesale Price Index inflation (highest deflation in 2QFY16), and Ind-Ra believes inflation will inch up from here, however will remain benign. This will translate into GDP deflator in FY17 growing around 3.0%. Ind-Ra therefore, believes that the nominal growth assumed in the Union Budget FY17 is achievable. This will also help the government to come closer to the tax collection target of FY17.

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